Forex Knowledge hub PART-1
School of Pipsology
Forex education is crucial for beginners.
Forex Knowledge hub is designed to help you
acquire the skills, knowledge, and abilities to become a
successful trader in the foreign exchange market. Our
definition of a successful trader is having the ability to do
three things:
1. Make pips
2. Keep pips
3. Repeat
If you can repeatedly do these three things, then you're on
your way! But it's no cakewalk.
Remember when you attended grade school? No? Well, according to our memories,here's how it worked.
You start schooling at the age of five and enter Kindergarten. The next year you enter 1st Grade. If you pass, the next year you enter 2nd Grade, and so on, all the way up to the
12th Grade. Depending on what grade you're in, you'd attend one of three schools:
1. Elementary school (Kindergarten - 5th grade)
2. Middle school (6th grade - 8th grade)
3. High school (9th grade - 12th grade)
This is how our lessons are broken apart, so you can relive the past and also be able to
learn and study forex trading techniques at your own pace – but our high school will have
more than 12 grades!
But there's more!
Learning doesn't end in high school!
If you've done well throughout grade school, you get a full scholarship to our college! All expenses paid and we won't even require you to fill out any applications or write essays.
What a deal!
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Our curriculum here at the School of Pipsology will make a bold attempt to cover all
aspects of forex trading. You will learn how to identify trading opportunities, how to time the market (aka smart guessing), and when to take profits or close a trade. But that's not all folks.
You will also learn how to predict the future and never have a losing trade.
Yeah right. In your dreams pal.
But there is plenty more to learn and you'll just have to see for yourself!
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School of Pipsology Curriculum:
Pre-school
Forex Basics.....( 9 – 46 )
The Skinny on Forex...9
How You Make Money Trading Forex...14
Know Your P’s and L’s...20
Would You Like Fries with Your Pips?...26
Choosing a Forex Broker...29
Opening a Trading Account...34
Forex versus Stocks...36
Forex versus Futures...38
Impress Your Date with Your Forex Lingo...41
Protect Yo Self Before You Wreck Yo Self...44
ELEMENTARY SCHOOL
Kindergarten
Types of charts......( 47 - 56 )
Types of Trading...47
Types of Charts...51
Summary...55
1st Grade
Japanese Candlesticks......( 57 – 67 )
What is a Candlestick?...57
Sexy Bodies and Strange Shadows...58
Basic Candlestick Patterns...59
Reversal Patterns...62
Summary...66
2nd Grade Support and Resistance, Trend Lines, and Channels......( 68 - 73 )
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Support and Resistance...68
Trend Lines...71
Channels...72
Summary...73
3rd Grade
Fibonacci......( 74 – 85)
Fibonacci Who?...74
Fibonacci Retracement...75
Fibonacci Extension...80
Summary...84
4th Grade
Moving Averages......( 86 - )
Price Smoothies...86
Simple Moving Average...86
Exponential Moving Average...88
SMA vs. EMA...89
Summary...90
5th Grade
Common Chart Indicators......( 92 – 105 )
Bollinger Bands...92
MACD...95
Parabolic SAR...97
Stochastics...98
Relative Strength Index...101
Putting It All Together...103
Summary...104
MIDDLE SCHOOL
6th Grade
Oscillators and Momentum Indicators......( 106 – 112 )
Leading vs. Lagging Indicators...106
Oscillators / Leading Indicators...107
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Momentum / Lagging Indicators...110
Summary...111
7th Grade
Important Chart Patterns......( 113 – 127 )
Pattern Schmatterns...113
Symmetrical Triangles...113
Ascending Triangles...115
Descending Triangles...116
Double Top...119
Double Bottom...121
Head and Shoulders...122
Reverse Head and Shoulders...123
Summary...125
8th Grade
Forex Pivot Points......( 127 – 133 )
Pivot Points...127
How to Calculate Pivot Points...128
How to Trade with Pivot Points...129
Forex Pivot Point Trading Tips...132
Summary...132
HIGH SCHOOL
9th Grade
Multiple Timeframes......( 134 – 144 )
Which Timeframe Should I Trade?...134
Timeframe Breakdowns...135
’Long or Short?’...137
Summary...143
10th Grade
Elliott Wave Theory......( 145 – 150 )
Elliott Wave Theory...145
ABC Correction...147
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Summary...150
11th Grade
Create Your Own Trading System......( 151 – 161 )
Can You Handle the Truth?...151
Six Steps to Setting Up Your System...152
Setup Your System in Six Steps...155
My ’So Easy It’s Ridiculous’ System...156
Summary...161
12th Grade
Market Hours - Know When to Trade......( 162 – 166 )
Market Hours...162
Best Days of the Week to Trade...164
When to Trade if You Want to Lose Money...165
Can't Trade During Busy Market Hours?...165
Summary...166
13th Grade
Money Management......( 167 – 171 )
Money Management...167
Drawdown and Maximum Drawdown?...168
Don't Lose Your Shirt...169
Risk to Reward...170
Summary...171
14th Grade
Plan Your Trade and Trade Your Plan......( 172 – 175 )
Why Have a Trading Plan?...172
What Should be in Your Trading Plan?...173
Summary...175
COLLEGE
Multiple Trading Personality Disorder......( 176 – 180 )
Discovering Your Trading Personality...176
Trading Personality Types...177
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What Kind of Trader Am I?...179
Summary...180
Trading News......( 181 – 186 )
Trading the News...181
Tradeable Reports...182
Trade at Your Own Risk!...184
News Trading Methods...185
Summary...186
Market Sentiment......( 187 – 191 )
Getting Sentimental with Forex Trading...187
Commitment of Traders Report...187
How to Use the COT Report...189
Summary...191
U.S. Dollar Index......( 192 – 196 )
What is the U.S. Dollar Index?...192
The USDX Components...193
How to Read the U.S. Dollar Index...194
Trade-Weighted U.S. Dollar Index...195
Carry Trade......( 197 – 202 )
The Carry Trade...197
How Does the Carry Trade Work for Forex?... 197
Carry Trade Risk...200
Carry Trade Criteria...200
Summary…201
The Lazy Forex Trader's Way to Riches......( 203 – 208 )
Are You Willing to Pay the Price?...203
Education...203
Time...205
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Capital aka Cash Money...206
Psychology...207
Summary...208
Be a Forex Trader, Not a Forex Sucker......( 209 – 210 )
Forex Scams...209
The Number One Cause of Death for Forex Traders......( 211 – 225 )
Leverage the Killer...211
Leverage Defined...212
Margin Defined...212
Margin Call Example... 214
More Leverage...217
How Leverage Affects Transaction Costs...223
Don’t Underestimate Leverage...225
Commodity Currencies......( 226 – 231 )
Commodity Currencies...226
Canadian Dollar and Oil...226
Australian Dollar and Gold...228
New Zealand Dollar...230
Summary...231
Currency Crosses......( 232 – 235 )
Currency Crosses...232
Back to Basics...232
Synthetic Pairs...234
Summary...235
Divergence Trading......( 236 – 245 )
Divergence Trading...236
Regular Divergence...237
Hidden Divergence...238
How to Trade Divergences...239
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9 Rules for Trading Divergences...240
Divergence Cheat Sheet...244
PRE-SCHOOL : FOREX BASIC
The Skinny on Forex
What is FOREX? The Foreign Exchange market, also referred to as the "FOREX" or "Forex"
or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the
world, with a volume of over $2 trillion a day. If you compare that to the $25 billion a day
volume that the New York Stock Exchange trades, you can easily see how enormous the
Foreign Exchange really is. It actually eq9 | P a g e uates to more than three times the total amount of the stocks and futures markets combined! Forex rocks! What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in
pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of
the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies. Unlike other financial markets like the New York Stock Exchange, the Forex spot market
has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run
electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex
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was originally intended to be used by bankers and large institutions - and not by us “little guys”. However, because of the rise of the Internet, online Forex trading firms are now
able to offer trading accounts to 'retail' traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.
BabyPips.com was created to introduce novice or beginner traders to all the essential aspects of foreign exchange, in a fun and easy-to-understand manner. What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument. Which Currencies Are Traded?
The most popular currencies along with their symbols are shown below:
Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency. When Can Currencies Be Traded?
The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial
center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend. The foreign exchange markets follow the sun around the world, so you can trade late at
night (if you’re a vampire) or in the morning (if you’re an early bird). Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm
but a bigger, nastier bird of prey can sneak up and eat you too…
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Time Zone New York GMT
Tokyo Open 7:00 pm 0:00
Tokyo Close 4:00 am 9:00
London Open 3:00 am 8:00
London Close 12:00 pm 17:00
New York Open 8:00 am 13:00
New York Close 5:00 pm 22:00
The Forex market (OTC)
The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market,
participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart.
The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of 89% of all transactions. The Euro’s share is second at 37%, while that of the yen is at 20%.
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Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why
so many people are choosing this market:
• No commissions.
No clearing fees, no exchange fees, no government fees, no brokerage fees.
Brokers are compensated for their services through something called the bid-ask spread.
• No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular
currency pair.
• No fixed lot size.
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you
determine your own lot size. This allows traders to participate with accounts as
small as $250 (although we explain later why a $250 account is a bad idea).
• Low transaction costs.
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent
under normal market conditions. At larger dealers, the spread could be as low as
.07 percent. Of course this depends on your leverage and all will be explained
later.
• A 24-hour market.
There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade
on a part-time basis, because you can choose when you want to trade--morning, noon or night.
• No one can corner the market.
The foreign exchange market is so huge and has so many participants that no
single entity (not even a central bank) can control the market price for an extended period of time.
• Leverage.
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same
time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword.
Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
• High Liquidity.
Because the Forex Market is so enormous, it is also extremely liquid. This means
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that under normal market conditions, with a click of a mouse you can
instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
• Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART
traders who would like to hone their trading skills with 'play' money before
opening a live trading account and risking real money.
• “Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of
money. The fact is, compared to trading stocks, options or futures, it doesn't.
Online Forex brokers offer "mini" and “micro” trading accounts, some with a
minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
What Tools Do I Need to Start Trading Forex?
A computer with a high-speed Internet connection and all the information on this site is all
that is needed to begin trading currencies.
What Does It Cost to Trade Forex?
An online currency trading (a “micro account”) may be opened with a couple hundred bucks. Do not laugh – micro accounts and its bigger cousin, the mini account, are both good ways to get your feet wet without drowning. For a micro account, we'd recommend
at least $1,000 to start. For a mini account, we’d recommend at least $10,000 to start.
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How You Make Money Trading Forex
The FX market, you buy or sell currencies. Placing a trade in the
foreign exchange market is simple: the mechanics of a trade are very
similar to those found in other markets (like the stock market), so if
you have any experience in trading, you should be able to pick it up
pretty quickly.
The object of Forex trading is to exchange one currency for another in the expectation
that the price will change, so that the currency you bought will increase in value compared to the one you sold.
Example of making money by buying Euros
Trader's Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange
rate of 1.18
+10,000 -11,800*
Two weeks later, you exchange your 10,000 euros
back into US dollars at the exchange rate of 1.2500.
-10,000 +12,500**
You earn a profit of $700. 0 +700
*EUR $10,000 x 1.18 = US $11,800
** EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For
example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one
Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read an FX Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously
buying one currency and selling another. Here is an example of a foreign exchange rate for
the British pound versus the U.S. dollar:
GBP/USD = 1.7500
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The first listed currency to the left of the slash ("/") is known as the base currency (in this
example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay
1.7500 U.S. dollar to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get
for selling one unit of the base currency. In the example above, you will receive 1.7500
U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate
(go down) relative to the quote currency.
Long/Short
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a
higher price. In trader's talk, this is called "going long" or taking a "long position". Just
remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a
lower price. This is called "going short" or taking a "short position". Short = sell. Bid/Ask Spread
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.
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The ask is the price at which the dealer will sell the base currency in exchange for the
quote currency. This means the ask is the price at which you will buy.
The difference between the bid and the ask price is popularly known as the spread.
Let's take a look at an example of a price quote taken from a
trading platform:
On this GBP/USD quote, the bid price is 1.7445 and the ask price
is 1.7449. Look at how this broker makes it so easy for you to
trade away your money.
If you want to sell GBP, you click "Sell" and you will sell pounds
at 1.7445. If you want to buy GBP, you click "Buy" and you will
buy pounds at 1.7449.
In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry! We will cover
fundamental analysis in a later lesson. For right now, try to pretend you know what’s
going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken, which is bad for the US dollar,
you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar.
If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the
expectation that they will fall versus the US dollar.
USD/JPY In this example the US dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought
U.S dollars in the expectation that they will rise versus the Japanese yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and
converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would
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execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD In this example the GBP is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to do better than the United States in terms
of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. If you believe the British's economy is slowing while the United State's economy remains strong like bull, you would execute a SELL GBP/USD order. By doing so you have sold
pounds in the expectation that they will depreciate against the US dollar.
USD/CHF In this example the USD is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus
the Swiss Franc. If you believe that the US housing market bubble burst will hurt future economic growth,
which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc. I don't have enough money to buy $10,000 euros. Can I still trade? You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with as little as $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Margin trading in the foreign exchange market is quantified in “lots”. We will be discussing these in depth in our next lesson. For now, just think of the term "lot" as the minimum
amount of currency you have to buy. When you go to the grocery store and want to buy an egg, you can't just buy a single egg; they come in dozens or "lots" of 12. In Forex, it
would be just as foolish to buy or sell $1 EUR, so they usually come in "lots" of $10,000 or
$100,000 depending on the type of account you have.
For Example:
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• You believe that signals in the market are indicating that the British Pound will go up
against the US Dollar.
• You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of
1.5000 and wait for the exchange rate to climb. This means you now control $100,000
worth of British Pound with $1,000. Your predictions come true and you decide to sell.
• You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). So for an initial capital investment
of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
Your Actions GBP USD
Your Money
You buy 100,000 pounds at the GBP/USD exchange
rate of 1.5000
+100,000 -150,000 $1,000
You blink for two seconds and the GBP/USD
exchange rate rises to 1.5050 and you sell.
-100,000 +150,500** $1,500
You have earned a profit of $500. 0 +500
When you decide to close a position, the deposit that you originally made is returned to
you and a calculation of your profits or losses is done. This profit or loss is then credited to
your account.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're
able to get a basic idea of how margin works.
Rollover No, this is not the same as rollover minutes from your cell phone carrier! For positions
open at your broker's "cut-off time" usually 5pm EST, there is a daily rollover interest rate
that a trader either pays or earns, depending on your established margin and position in
the market. If you do not want to earn or pay interest on your positions, simply make sure
they are all closed before 5pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If a client is buying a currency with a
higher interest rate than the one he/she is borrowing, the net differential will be positive
(i.e. USD/JPY) – and the client will earn funds as a result. Ask your broker or dealer about specific details regarding rollover.
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Don't know what the interest rates are for each currency? Here is a chart to help you out.
Accurate as of 03/19/07.
Demo Trading
You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account. Why is it free? It’s because the broker wants you to learn
the ins and outs of their trading platform, and have a good time trading without risk, so you’ll fall in love with them and deposit real money. The demo account allows you to learn
about the Forex markets and test your trading skills with ZERO risk.
YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT
PUTTING REAL MONEY ON THE LINE.
I REPEAT - YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
"Don't Lose Your Money" Declaration
Place your hand on your heart and say...
"I will demo trade for at least 2 months before I trade with real money."
Now touch your head with your index finger and say...
"I am a smart and patient Forex trader!"
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Know Your P’s and L’s
Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you
how they are calculated.
Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss. What the heck is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250
to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would
be as follows. Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places) In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
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USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value,
we have to add one more step.
EUR/USD:
1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
GBP/USD:
1.7975
.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
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When rounded up it would be 0.0001
You’re probably rolling your eyes back and thinking do I really need to work all this out
and the answer is NO. Nearly all forex brokers will work all this out for you automatically.
It’s always good for you to know how they work it out.
In the next section, we will discuss how these seemingly insignificant amounts can add up.
What the heck is a Lot?
Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you
need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples
to see how it affects the pip value.
USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip
USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip
In cases where the US Dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip. Your broker may have a different convention for calculating pip value relative to lot size
but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading. How the heck do I calculate profit and loss?
School of Pipsology - 23
So now that you know how to calculate pip value, let’s look at how you calculate your
profit or loss.
Let’s buy US dollars and Sell Swiss Francs.
The rate you are quoted is 1.4525 / 1.4530. Because you are buying US you will be working on the 1.4530, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 1.4530.
A few hours later, the price moves to 1.4550 and you decide to close your trade. The new quote for USD/CHF is 1.4550 / 14555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must
take the 1.4550 price. The price traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
Using our formula from before, we now have (.0001/1.4550) x $100,000 -= $6.87 per pip x
20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don't pay the spread when you enter but only
when you exit. What the heck is Leverage?
You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to
buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit,
which he will hold you for but not necessarily keep. Sounds too good to be true? Well this
is how forex trading using leverage works.
School of Pipsology - 24
The amount of leverage you use will depend on your broker and what you feel
comfortable with.
Typically the broker will require a minimum account size, also known as account margin or
initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded. For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have
$5,000 they may allow you to trade up to $500,000 of Forex.
The minimum security (margin) for each lot will vary from broker to broker. In the
example above, the broker required a one percent margin. This means that for every
$100,000 traded, the broker wants $1,000 as a deposit on the position.
What the heck is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin),
your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.
Example #1
Let’s say you open a regular Forex account with $2,000 (not a smart idea). You open 1 lot
of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money
available to open new positions or sustain trading losses. Since you started with $2,000,
your usable margin is $2,000. But when you opened 1 lot, which requires a margin
requirement of $1,000, your usable margin is now $1,000.
If your losses exceed your usable margin of $1,000 you will get a margin call.
School of Pipsology - 25
Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD,
with a margin requirement is $1000. Remember, usable margin is the money you have
available to open new positions or sustain trading losses. So prior to opening 1 lot, you
have a usable margin of $10,000. After you open the trade, you now have $9,000 usable
margin and $1,000 of used margin.
If your losses exceed your usable margin of $9,000, you will get a margin call.
Make sure you know the difference between usable margin and used margin.
If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position
to limit your risk and his risk. As a result, you can never lose more than you deposit. If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.
You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the
position over the weekend it may rise to 2% or higher.
The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you
thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.
Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage
Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.
School of Pipsology - 26
Would You Like Fries with Your Pips?
The term "order" refers to how you will enter or exit a trade. Here we discuss the different types of orders that can be placed into the foreign exchange market. Be sure that you
know which types of orders your broker accepts. Different brokers accept different types of orders.
Order Types
Basic Order Types
There are some basic order types that all brokers provide and some others that sound
weird. The basic ones are:
• Market order
A market order is an order to buy or sell at the current market price. For example,
EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would
click buy and your trading platform would instantly execute a buy order at that exact price.
If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like the current price, you click once and it's yours! The only difference is you are buying or selling
one currency against another currency instead of buying Britney Spears CDs.
• Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially
contains two variables, price and duration. For example, EUR/USD is currently trading at
1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your
monitor and wait for it to hit 1.2070 (at which point you would click a buy market order),
or you can set a buy limit order at 1.2070 (then you could walk away from your computer
to attend your ballroom dancing class). If the price goes up to 1.2070, your trading
School of Pipsology - 27
platform will automatically execute a buy order at that exact price. You specify the price at
which you wish to buy/sell a certain currency pair and also specify how long you want the
order to remain active (GTC or GFD).
• Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing
additional losses if price goes against you. A stop-loss order remains in effect until the
position is liquidated or you cancel the stop-loss order. For example, you went long (buy)
EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This
means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your
position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply
set a stop-loss order on any open positions so you won't miss your basket weaving class.
Weird Sounding Order Types
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not
cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign
exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets
close, but I’d recommend you double check with your broker.
• OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and
duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You
want to either buy at 1.2095 over the resistance level in anticipation of a breakout or
initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095
is reached, you will buy order will be triggered and the 1.1985 sell order will be
automatically canceled.
Always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules
simple is the best strategy.
Summary
The basic order types (market, stop loss, and limit) are usually all that most traders ever need. Unless you are a veteran trader (yeah right), don’t get fancy and design a system of
trading requiring a large number of orders sandwiched in the market at all times – stick with the basic stuff first.
School of Pipsology - 28
Make sure you fully understand and are comfortable with your broker’s order entry
system before executing a trade.
DO NOT make a trade with real money until you have an extremely high comfort level with the trading platform and order entry system.
School of Pipsology - 29
Choosing a Forex Broker
Before trading Forex you need to set up an account with a Forex broker. So what exactly is
a broker? In simplest terms, a broker is an individual or a company that buys and sells
orders according to the trader's decisions. Brokers earn money by charging a commission
or a fee for their services.
You may feel overwhelmed by the number of brokers who offer their services online.
Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.
Is the Forex broker regulated?
When selecting a prospective Forex broker, find out with which regulatory agencies it is
registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your
entire savings will something be done.
In the United States a broker should be registered as a Futures Commission Merchant
(FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive
trade practices. You can verify Commodity Futures Trading Commission (CFTC) registration and NFA
membership status of a particular broker and check their disciplinary history by phoning
NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's
Web site at www.nfa.futures.org/basicnet/.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-
Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.
They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex
trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.
School of Pipsology - 30
Customer Service
Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by
phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an
account. Here’s a good tip: choose several online brokers and contact their help desks. Seeing how
quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you
certainly wouldn't want to trust them with your business. Just be aware that as in other
types of businesses, pre-sales service might be better than post-sales service.
Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very
important. Get a feel for the options that are available by trying out a demo account at a few online brokers.
Closely examine the broker’s screen layout. It should include:
• the ability to view real-time currency exchange rate quotes,
• an account summary showing your current account balance with realized and
unrealized profit and loss, margin available, and any margin locked in open
positions.
Most trading platforms are either Web based (in Java), or a client-based program you can
install on your computer, and which version you choose is your personal preference:
• Web based software is hosted on your broker’s web site. You won’t have to install
any software on your own computer, and you’ll be able to log in from any
computer that has an Internet connection.
• A client-based software program, or one that you download and install, will only
allow you to trade on your own computer (unless you install the program on every
computer you use).
School of Pipsology - 31
Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to
run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading
platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.
Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses
and hackers during transmissions than "download and install" software.
But always be sure to open a demo account and test out the broker's platform before
opening a real account!
Don’t forget your high speed Internet connection
The Forex market is a fast moving market and you will need up-to-the second information
to make informed trading decisions. Make sure you have a high speed Internet
connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough! Bells and Whistles
Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software.
Upgraded software packages are usually offered as an extra monthly fee by brokers.
Most brokers now offer integrated charting and technical analysis packages with their
trading platforms. The level of integration with the trading platforms varies and is worth
understanding carefully.
Mini/Micro Accounts
Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started
and test your trading skills and gain experience. Broker Policies
Before selecting an online Forex broker, you should closely examine their features and policies. These include:
School of Pipsology - 32
• Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven
major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips required per
trade by the broker, the greater the profit that the trader makes. Comparing pip
spreads of half dozen brokers will reveal different transaction costs. For example,
the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s
even better.
• Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater
the potential for higher profits and losses. Margin percentages vary from .25% and
up. Low margin requirements are great when your trades are good, but not so
great when you are wrong. Be realistic about margins and remember that they
swing both ways.
• Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and
100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot
consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is
called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots)
which allow you create your own unit size.
• Rollover Charges
Rollover charges are determined by the difference between the interest rate of the
country of the base currency and the interest rates of the other country. The
greater the interest rate differential between the two currencies in the currency
pair, the greater the rollover charge will be. For example, when trading GBP/USD,
if the British pound has the greater interest differential with the U.S. dollar, then
the rollover charge for holding British pound positions would be the most
expensive. On the other hand, if the Swiss Franc were to have the smallest interest
differential to the U.S. dollar, then overnight charges for USD/CHF would be the
least expensive of the currency pairs.
• Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates
normally fluctuate with the prevailing national rates. If you decide to take an
extended break from trading, the money in your margin account will be accruing
interest. Keep in mind that most brokers DO NOT allow you to accrue interest
unless your margin requirement is at least 2% (50:1).
• Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of
operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST
Friday.
School of Pipsology - 33
Other Policies
Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the
nuances that a specific broker may impose on a new trader.
Finding the right broker is a critical part of the process. It’s not easy and requires some
real work on your part. Don’t pick the first one that looks good to you. Keep looking and
trying different demo accounts.
Summary
What to look for in an online Forex broker/dealer:
1. Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any
given currency pair. Lower spreads save you money.
2. Low minimum account openings.
For those that are new to Forex trading and for those that don’t have millions of
dollars in risk capital to trade, being able to open a micro trading account with only
$250 (we recommend at least $1,000) is a great feature for new traders.
3. Instant automatic execution of your orders.
This is very important when choosing a Forex broker. Don’t settle with a firm that
re-quotes you when you click on a price or a firm that allows for price ‘slippage’.
This is very important when trading for small profits. You want what we call a
WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution
of your orders and the price you see and "click" is the price that you should
get...WYSIWYG = What You See Is What You Get!
4. Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis
available to active traders. Look for a broker that provides free professional
charting services and allows traders to trade directly on the charts.
5. Leverage
Leverage can either make you super rich or super broke. Most likely, it will be the
latter. As an inexperienced trader, you don't want too much leverage. A good rule
of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and
200:1 for Mini (10k) accounts.
School of Pipsology - 34
Opening a Trading Account
Opening a new online trading account with a Forex broker can be done in three simple
steps:
1. Selecting an account type
2. Registration
3. Activating your account
Before trading a dime of your hard earned money, you may want to think about opening
demo account. Actually, open up two or three demos - why not? It’s all FREE! Try out
several different brokers to get a feel for the right one for you.
Account Types
When you're ready to open a live account, you have the choice of opening a Forex trading
account under your personal name or a business name. Also, you will have to decide
whether or not you want to open a "standard" account or a "mini" account (or "micro"
account if available). Inexperienced traders or traders with a small amount of capital to
trade should always open a mini account. Only experienced traders with lots of money
should open a standard account.
Always read the fine print.
Some brokers have a “managed account” option in their applications. If you want the
broker to trade your account for you, pick this, but obviously you’re here to learn how to
trade the Forex for yourself. Besides, opening a managed account typically requires a
pretty big minimum deposit - $25,000 or higher - and the broker also takes a portion of the profits.
Also, make sure you open a Forex spot account and not a “forwards” or “futures” account.
Registration
You will have to submit paperwork in order to open an account and the forms will vary
from broker to broker. They are usually provided in PDF format and can be viewed and
printed using Adobe Acrobat Reader program.
Account Activation
School of Pipsology - 35
Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation. After these steps have been completed, you will receive a final email with your username, password, and instructions
on how to fund your account.
So all that’s left is for you to login and start trading. Pretty easy huh?
But wait a darn minute!
STOP!
We strongly advise you spend some time at our entire School of Pipsology before you
start risking real money.
Why?
Because if you don’t, you will lose all of your money and freak out!
You’re probably thinking, “So if I read through your School of Pipsology first, I will not lose
any money?”
No, we’re not saying that. You will still probably lose money...
School of Pipsology - 36
But you’ll lose LESS, much less, and probably feel fine that you lost money. Go through our
entire School of Pipsology and you'll understand what we mean.
Forex versus Stocks
Forex versus Stocks Advantages
Advantage Forex Stocks
24-hour Trading YES NO
Commission Free Trading YES NO
Instant Execution of Market Orders YES NO
Short-Selling without an Uptick YES NO
24-Hour Market
The Forex market is a seamless 24-hour market. Most brokers are open from Sunday at
2PM EST until Friday at 4 PM EST with customer service available 24/7. With the ability to
trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
Commission Free Trading
Most Forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, Forex trading costs are lower than those of any other market. The brokers are compensated for theirs services through the bid/ask prices. Instantaneous Execution of Market Orders
Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You’re able to execute directly off real-time streaming prices (Yeeeaah!).
There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order
execution may experience delays.
School of Pipsology - 37
Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market.
Trading opportunities exist in the currency market regardless of whether a trader is long
or short, or which way the market is moving. Since currency trading always involves
buying one currency and selling another, there is no structural bias to the market. So you
always have equal access to trade in a rising or falling market.
Look at Mr. Forex. He's so confident and sexy. Mr. Stocks has no chance!
More Reasons to Like Forex
No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded
will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker
responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.
Buy/Sell programs do not control the market
How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because
School of Pipsology - 38
today is "triple witching day", all as an explanation of why this stock is up or the market in
general is down or positive on the session. The stock market is very susceptible to large
fund buying and selling.
In spot trading, the liquidity of the Forex market makes the likelihood of any one fund or
bank to control a particular currency very slim. Banks, hedge funds, governments, retail
currency conversion houses and large net-worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.
Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a
prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the
government does to step in and discourage this type of activity, we have not heard the last of it.
IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that
need the companies as clients. That catch-22 will never disappear.
Foreign exchange, as the prime market, generates billions in revenue for the world's banks
and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal
flow, they just analyze the forex market.
8,000 stocks versus 4 major currency pairs
There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of
so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of the market trades the 4 major pairs. Aren’t four pairs much easier to keep
an eye on than thousands of stocks? I’d say so.
Forex versus Futures
Forex versus Futures Advantages
Advantage Forex Futures
24-hour Trading YES NO
Commission Free Trading* YES NO
Up to 400:1 Leverage YES NO
Price Certainty YES NO
Guaranteed Limited Risk YES NO
School of Pipsology - 39
"Hey Mr. Futures, don't our short shorts look cool?"
Liquidity
In the spot Forex market, almost $2 trillion is traded daily, making it the largest and most
liquid market in the world. This market can absorb trading volume and transaction sizes
that dwarf the capacity of any other market. The futures market traders a puny $30 billion
per day. Thirty billion?!! Peanuts! The futures markets can't compete with its limited
liquidity. The Forex market is always liquid, meaning positions can be liquidated and stop
orders executed without slippage except in extremely volatile market conditions.
24-Hour Market
At 2:15 p.m. EST Sunday, trading begins as markets open in Sydney and Singapore. At 7
p.m. EST the Tokyo market opens, followed by London at 2 a.m. EST. And finally, New
York opens at 8 a.m. EST and closes at 5 p.m. EST. So, before New York trading closes the
Sydney and Singapore markets are back open - it’s a 24 hour seamless market! As a
trader, this allows you to react to favorable or unfavorable news by trading immediately.
If important data comes in from England or Japan while the U.S. futures market is closed,
the next day's opening could be a wild ride. (Overnight markets in futures currency
contracts exist, but they are thinly traded, not very liquid, and are difficult for the average
investor to access).
School of Pipsology - 40
School of Pipsology
Forex education is crucial for beginners.
Forex Knowledge hub is designed to help you
acquire the skills, knowledge, and abilities to become a
successful trader in the foreign exchange market. Our
definition of a successful trader is having the ability to do
three things:
1. Make pips
2. Keep pips
3. Repeat
If you can repeatedly do these three things, then you're on
your way! But it's no cakewalk.
Remember when you attended grade school? No? Well, according to our memories,here's how it worked.
You start schooling at the age of five and enter Kindergarten. The next year you enter 1st Grade. If you pass, the next year you enter 2nd Grade, and so on, all the way up to the
12th Grade. Depending on what grade you're in, you'd attend one of three schools:
1. Elementary school (Kindergarten - 5th grade)
2. Middle school (6th grade - 8th grade)
3. High school (9th grade - 12th grade)
This is how our lessons are broken apart, so you can relive the past and also be able to
learn and study forex trading techniques at your own pace – but our high school will have
more than 12 grades!
But there's more!
Learning doesn't end in high school!
If you've done well throughout grade school, you get a full scholarship to our college! All expenses paid and we won't even require you to fill out any applications or write essays.
What a deal!
School of Pipsology - 2
Our curriculum here at the School of Pipsology will make a bold attempt to cover all
aspects of forex trading. You will learn how to identify trading opportunities, how to time the market (aka smart guessing), and when to take profits or close a trade. But that's not all folks.
You will also learn how to predict the future and never have a losing trade.
Yeah right. In your dreams pal.
But there is plenty more to learn and you'll just have to see for yourself!
School of Pipsology - 3
School of Pipsology Curriculum:
Pre-school
Forex Basics.....( 9 – 46 )
The Skinny on Forex...9
How You Make Money Trading Forex...14
Know Your P’s and L’s...20
Would You Like Fries with Your Pips?...26
Choosing a Forex Broker...29
Opening a Trading Account...34
Forex versus Stocks...36
Forex versus Futures...38
Impress Your Date with Your Forex Lingo...41
Protect Yo Self Before You Wreck Yo Self...44
ELEMENTARY SCHOOL
Kindergarten
Types of charts......( 47 - 56 )
Types of Trading...47
Types of Charts...51
Summary...55
1st Grade
Japanese Candlesticks......( 57 – 67 )
What is a Candlestick?...57
Sexy Bodies and Strange Shadows...58
Basic Candlestick Patterns...59
Reversal Patterns...62
Summary...66
2nd Grade Support and Resistance, Trend Lines, and Channels......( 68 - 73 )
School of Pipsology - 4
Support and Resistance...68
Trend Lines...71
Channels...72
Summary...73
3rd Grade
Fibonacci......( 74 – 85)
Fibonacci Who?...74
Fibonacci Retracement...75
Fibonacci Extension...80
Summary...84
4th Grade
Moving Averages......( 86 - )
Price Smoothies...86
Simple Moving Average...86
Exponential Moving Average...88
SMA vs. EMA...89
Summary...90
5th Grade
Common Chart Indicators......( 92 – 105 )
Bollinger Bands...92
MACD...95
Parabolic SAR...97
Stochastics...98
Relative Strength Index...101
Putting It All Together...103
Summary...104
MIDDLE SCHOOL
6th Grade
Oscillators and Momentum Indicators......( 106 – 112 )
Leading vs. Lagging Indicators...106
Oscillators / Leading Indicators...107
School of Pipsology - 5
Momentum / Lagging Indicators...110
Summary...111
7th Grade
Important Chart Patterns......( 113 – 127 )
Pattern Schmatterns...113
Symmetrical Triangles...113
Ascending Triangles...115
Descending Triangles...116
Double Top...119
Double Bottom...121
Head and Shoulders...122
Reverse Head and Shoulders...123
Summary...125
8th Grade
Forex Pivot Points......( 127 – 133 )
Pivot Points...127
How to Calculate Pivot Points...128
How to Trade with Pivot Points...129
Forex Pivot Point Trading Tips...132
Summary...132
HIGH SCHOOL
9th Grade
Multiple Timeframes......( 134 – 144 )
Which Timeframe Should I Trade?...134
Timeframe Breakdowns...135
’Long or Short?’...137
Summary...143
10th Grade
Elliott Wave Theory......( 145 – 150 )
Elliott Wave Theory...145
ABC Correction...147
School of Pipsology - 6
Summary...150
11th Grade
Create Your Own Trading System......( 151 – 161 )
Can You Handle the Truth?...151
Six Steps to Setting Up Your System...152
Setup Your System in Six Steps...155
My ’So Easy It’s Ridiculous’ System...156
Summary...161
12th Grade
Market Hours - Know When to Trade......( 162 – 166 )
Market Hours...162
Best Days of the Week to Trade...164
When to Trade if You Want to Lose Money...165
Can't Trade During Busy Market Hours?...165
Summary...166
13th Grade
Money Management......( 167 – 171 )
Money Management...167
Drawdown and Maximum Drawdown?...168
Don't Lose Your Shirt...169
Risk to Reward...170
Summary...171
14th Grade
Plan Your Trade and Trade Your Plan......( 172 – 175 )
Why Have a Trading Plan?...172
What Should be in Your Trading Plan?...173
Summary...175
COLLEGE
Multiple Trading Personality Disorder......( 176 – 180 )
Discovering Your Trading Personality...176
Trading Personality Types...177
School of Pipsology - 7
What Kind of Trader Am I?...179
Summary...180
Trading News......( 181 – 186 )
Trading the News...181
Tradeable Reports...182
Trade at Your Own Risk!...184
News Trading Methods...185
Summary...186
Market Sentiment......( 187 – 191 )
Getting Sentimental with Forex Trading...187
Commitment of Traders Report...187
How to Use the COT Report...189
Summary...191
U.S. Dollar Index......( 192 – 196 )
What is the U.S. Dollar Index?...192
The USDX Components...193
How to Read the U.S. Dollar Index...194
Trade-Weighted U.S. Dollar Index...195
Carry Trade......( 197 – 202 )
The Carry Trade...197
How Does the Carry Trade Work for Forex?... 197
Carry Trade Risk...200
Carry Trade Criteria...200
Summary…201
The Lazy Forex Trader's Way to Riches......( 203 – 208 )
Are You Willing to Pay the Price?...203
Education...203
Time...205
School of Pipsology - 8
Capital aka Cash Money...206
Psychology...207
Summary...208
Be a Forex Trader, Not a Forex Sucker......( 209 – 210 )
Forex Scams...209
The Number One Cause of Death for Forex Traders......( 211 – 225 )
Leverage the Killer...211
Leverage Defined...212
Margin Defined...212
Margin Call Example... 214
More Leverage...217
How Leverage Affects Transaction Costs...223
Don’t Underestimate Leverage...225
Commodity Currencies......( 226 – 231 )
Commodity Currencies...226
Canadian Dollar and Oil...226
Australian Dollar and Gold...228
New Zealand Dollar...230
Summary...231
Currency Crosses......( 232 – 235 )
Currency Crosses...232
Back to Basics...232
Synthetic Pairs...234
Summary...235
Divergence Trading......( 236 – 245 )
Divergence Trading...236
Regular Divergence...237
Hidden Divergence...238
How to Trade Divergences...239
School of Pipsology - 9
9 Rules for Trading Divergences...240
Divergence Cheat Sheet...244
PRE-SCHOOL : FOREX BASIC
The Skinny on Forex
What is FOREX? The Foreign Exchange market, also referred to as the "FOREX" or "Forex"
or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the
world, with a volume of over $2 trillion a day. If you compare that to the $25 billion a day
volume that the New York Stock Exchange trades, you can easily see how enormous the
Foreign Exchange really is. It actually eq9 | P a g e uates to more than three times the total amount of the stocks and futures markets combined! Forex rocks! What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in
pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of
the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies. Unlike other financial markets like the New York Stock Exchange, the Forex spot market
has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run
electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex
School of Pipsology - 10
was originally intended to be used by bankers and large institutions - and not by us “little guys”. However, because of the rise of the Internet, online Forex trading firms are now
able to offer trading accounts to 'retail' traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.
BabyPips.com was created to introduce novice or beginner traders to all the essential aspects of foreign exchange, in a fun and easy-to-understand manner. What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument. Which Currencies Are Traded?
The most popular currencies along with their symbols are shown below:
Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency. When Can Currencies Be Traded?
The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial
center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend. The foreign exchange markets follow the sun around the world, so you can trade late at
night (if you’re a vampire) or in the morning (if you’re an early bird). Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm
but a bigger, nastier bird of prey can sneak up and eat you too…
School of Pipsology - 11
Time Zone New York GMT
Tokyo Open 7:00 pm 0:00
Tokyo Close 4:00 am 9:00
London Open 3:00 am 8:00
London Close 12:00 pm 17:00
New York Open 8:00 am 13:00
New York Close 5:00 pm 22:00
The Forex market (OTC)
The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market,
participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart.
The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of 89% of all transactions. The Euro’s share is second at 37%, while that of the yen is at 20%.
School of Pipsology - 12
Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why
so many people are choosing this market:
• No commissions.
No clearing fees, no exchange fees, no government fees, no brokerage fees.
Brokers are compensated for their services through something called the bid-ask spread.
• No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular
currency pair.
• No fixed lot size.
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you
determine your own lot size. This allows traders to participate with accounts as
small as $250 (although we explain later why a $250 account is a bad idea).
• Low transaction costs.
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent
under normal market conditions. At larger dealers, the spread could be as low as
.07 percent. Of course this depends on your leverage and all will be explained
later.
• A 24-hour market.
There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade
on a part-time basis, because you can choose when you want to trade--morning, noon or night.
• No one can corner the market.
The foreign exchange market is so huge and has so many participants that no
single entity (not even a central bank) can control the market price for an extended period of time.
• Leverage.
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same
time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword.
Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
• High Liquidity.
Because the Forex Market is so enormous, it is also extremely liquid. This means
School of Pipsology - 13
that under normal market conditions, with a click of a mouse you can
instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
• Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART
traders who would like to hone their trading skills with 'play' money before
opening a live trading account and risking real money.
• “Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of
money. The fact is, compared to trading stocks, options or futures, it doesn't.
Online Forex brokers offer "mini" and “micro” trading accounts, some with a
minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
What Tools Do I Need to Start Trading Forex?
A computer with a high-speed Internet connection and all the information on this site is all
that is needed to begin trading currencies.
What Does It Cost to Trade Forex?
An online currency trading (a “micro account”) may be opened with a couple hundred bucks. Do not laugh – micro accounts and its bigger cousin, the mini account, are both good ways to get your feet wet without drowning. For a micro account, we'd recommend
at least $1,000 to start. For a mini account, we’d recommend at least $10,000 to start.
School of Pipsology - 14
How You Make Money Trading Forex
The FX market, you buy or sell currencies. Placing a trade in the
foreign exchange market is simple: the mechanics of a trade are very
similar to those found in other markets (like the stock market), so if
you have any experience in trading, you should be able to pick it up
pretty quickly.
The object of Forex trading is to exchange one currency for another in the expectation
that the price will change, so that the currency you bought will increase in value compared to the one you sold.
Example of making money by buying Euros
Trader's Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange
rate of 1.18
+10,000 -11,800*
Two weeks later, you exchange your 10,000 euros
back into US dollars at the exchange rate of 1.2500.
-10,000 +12,500**
You earn a profit of $700. 0 +700
*EUR $10,000 x 1.18 = US $11,800
** EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For
example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one
Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read an FX Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously
buying one currency and selling another. Here is an example of a foreign exchange rate for
the British pound versus the U.S. dollar:
GBP/USD = 1.7500
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The first listed currency to the left of the slash ("/") is known as the base currency (in this
example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay
1.7500 U.S. dollar to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get
for selling one unit of the base currency. In the example above, you will receive 1.7500
U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate
(go down) relative to the quote currency.
Long/Short
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a
higher price. In trader's talk, this is called "going long" or taking a "long position". Just
remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a
lower price. This is called "going short" or taking a "short position". Short = sell. Bid/Ask Spread
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.
School of Pipsology - 16
The ask is the price at which the dealer will sell the base currency in exchange for the
quote currency. This means the ask is the price at which you will buy.
The difference between the bid and the ask price is popularly known as the spread.
Let's take a look at an example of a price quote taken from a
trading platform:
On this GBP/USD quote, the bid price is 1.7445 and the ask price
is 1.7449. Look at how this broker makes it so easy for you to
trade away your money.
If you want to sell GBP, you click "Sell" and you will sell pounds
at 1.7445. If you want to buy GBP, you click "Buy" and you will
buy pounds at 1.7449.
In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry! We will cover
fundamental analysis in a later lesson. For right now, try to pretend you know what’s
going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken, which is bad for the US dollar,
you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar.
If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the
expectation that they will fall versus the US dollar.
USD/JPY In this example the US dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought
U.S dollars in the expectation that they will rise versus the Japanese yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and
converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would
School of Pipsology - 17
execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD In this example the GBP is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to do better than the United States in terms
of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. If you believe the British's economy is slowing while the United State's economy remains strong like bull, you would execute a SELL GBP/USD order. By doing so you have sold
pounds in the expectation that they will depreciate against the US dollar.
USD/CHF In this example the USD is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus
the Swiss Franc. If you believe that the US housing market bubble burst will hurt future economic growth,
which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc. I don't have enough money to buy $10,000 euros. Can I still trade? You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with as little as $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Margin trading in the foreign exchange market is quantified in “lots”. We will be discussing these in depth in our next lesson. For now, just think of the term "lot" as the minimum
amount of currency you have to buy. When you go to the grocery store and want to buy an egg, you can't just buy a single egg; they come in dozens or "lots" of 12. In Forex, it
would be just as foolish to buy or sell $1 EUR, so they usually come in "lots" of $10,000 or
$100,000 depending on the type of account you have.
For Example:
School of Pipsology - 18
• You believe that signals in the market are indicating that the British Pound will go up
against the US Dollar.
• You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of
1.5000 and wait for the exchange rate to climb. This means you now control $100,000
worth of British Pound with $1,000. Your predictions come true and you decide to sell.
• You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). So for an initial capital investment
of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
Your Actions GBP USD
Your Money
You buy 100,000 pounds at the GBP/USD exchange
rate of 1.5000
+100,000 -150,000 $1,000
You blink for two seconds and the GBP/USD
exchange rate rises to 1.5050 and you sell.
-100,000 +150,500** $1,500
You have earned a profit of $500. 0 +500
When you decide to close a position, the deposit that you originally made is returned to
you and a calculation of your profits or losses is done. This profit or loss is then credited to
your account.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're
able to get a basic idea of how margin works.
Rollover No, this is not the same as rollover minutes from your cell phone carrier! For positions
open at your broker's "cut-off time" usually 5pm EST, there is a daily rollover interest rate
that a trader either pays or earns, depending on your established margin and position in
the market. If you do not want to earn or pay interest on your positions, simply make sure
they are all closed before 5pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If a client is buying a currency with a
higher interest rate than the one he/she is borrowing, the net differential will be positive
(i.e. USD/JPY) – and the client will earn funds as a result. Ask your broker or dealer about specific details regarding rollover.
School of Pipsology - 19
Don't know what the interest rates are for each currency? Here is a chart to help you out.
Accurate as of 03/19/07.
Demo Trading
You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account. Why is it free? It’s because the broker wants you to learn
the ins and outs of their trading platform, and have a good time trading without risk, so you’ll fall in love with them and deposit real money. The demo account allows you to learn
about the Forex markets and test your trading skills with ZERO risk.
YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT
PUTTING REAL MONEY ON THE LINE.
I REPEAT - YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
"Don't Lose Your Money" Declaration
Place your hand on your heart and say...
"I will demo trade for at least 2 months before I trade with real money."
Now touch your head with your index finger and say...
"I am a smart and patient Forex trader!"
School of Pipsology - 20
Know Your P’s and L’s
Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you
how they are calculated.
Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss. What the heck is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250
to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would
be as follows. Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places) In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
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USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value,
we have to add one more step.
EUR/USD:
1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
GBP/USD:
1.7975
.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
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When rounded up it would be 0.0001
You’re probably rolling your eyes back and thinking do I really need to work all this out
and the answer is NO. Nearly all forex brokers will work all this out for you automatically.
It’s always good for you to know how they work it out.
In the next section, we will discuss how these seemingly insignificant amounts can add up.
What the heck is a Lot?
Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you
need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples
to see how it affects the pip value.
USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip
USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip
In cases where the US Dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip. Your broker may have a different convention for calculating pip value relative to lot size
but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading. How the heck do I calculate profit and loss?
School of Pipsology - 23
So now that you know how to calculate pip value, let’s look at how you calculate your
profit or loss.
Let’s buy US dollars and Sell Swiss Francs.
The rate you are quoted is 1.4525 / 1.4530. Because you are buying US you will be working on the 1.4530, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 1.4530.
A few hours later, the price moves to 1.4550 and you decide to close your trade. The new quote for USD/CHF is 1.4550 / 14555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must
take the 1.4550 price. The price traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
Using our formula from before, we now have (.0001/1.4550) x $100,000 -= $6.87 per pip x
20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don't pay the spread when you enter but only
when you exit. What the heck is Leverage?
You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to
buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit,
which he will hold you for but not necessarily keep. Sounds too good to be true? Well this
is how forex trading using leverage works.
School of Pipsology - 24
The amount of leverage you use will depend on your broker and what you feel
comfortable with.
Typically the broker will require a minimum account size, also known as account margin or
initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded. For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have
$5,000 they may allow you to trade up to $500,000 of Forex.
The minimum security (margin) for each lot will vary from broker to broker. In the
example above, the broker required a one percent margin. This means that for every
$100,000 traded, the broker wants $1,000 as a deposit on the position.
What the heck is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin),
your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.
Example #1
Let’s say you open a regular Forex account with $2,000 (not a smart idea). You open 1 lot
of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money
available to open new positions or sustain trading losses. Since you started with $2,000,
your usable margin is $2,000. But when you opened 1 lot, which requires a margin
requirement of $1,000, your usable margin is now $1,000.
If your losses exceed your usable margin of $1,000 you will get a margin call.
School of Pipsology - 25
Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD,
with a margin requirement is $1000. Remember, usable margin is the money you have
available to open new positions or sustain trading losses. So prior to opening 1 lot, you
have a usable margin of $10,000. After you open the trade, you now have $9,000 usable
margin and $1,000 of used margin.
If your losses exceed your usable margin of $9,000, you will get a margin call.
Make sure you know the difference between usable margin and used margin.
If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position
to limit your risk and his risk. As a result, you can never lose more than you deposit. If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.
You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the
position over the weekend it may rise to 2% or higher.
The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you
thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.
Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage
Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.
School of Pipsology - 26
Would You Like Fries with Your Pips?
The term "order" refers to how you will enter or exit a trade. Here we discuss the different types of orders that can be placed into the foreign exchange market. Be sure that you
know which types of orders your broker accepts. Different brokers accept different types of orders.
Order Types
Basic Order Types
There are some basic order types that all brokers provide and some others that sound
weird. The basic ones are:
• Market order
A market order is an order to buy or sell at the current market price. For example,
EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would
click buy and your trading platform would instantly execute a buy order at that exact price.
If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like the current price, you click once and it's yours! The only difference is you are buying or selling
one currency against another currency instead of buying Britney Spears CDs.
• Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially
contains two variables, price and duration. For example, EUR/USD is currently trading at
1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your
monitor and wait for it to hit 1.2070 (at which point you would click a buy market order),
or you can set a buy limit order at 1.2070 (then you could walk away from your computer
to attend your ballroom dancing class). If the price goes up to 1.2070, your trading
School of Pipsology - 27
platform will automatically execute a buy order at that exact price. You specify the price at
which you wish to buy/sell a certain currency pair and also specify how long you want the
order to remain active (GTC or GFD).
• Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing
additional losses if price goes against you. A stop-loss order remains in effect until the
position is liquidated or you cancel the stop-loss order. For example, you went long (buy)
EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This
means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your
position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply
set a stop-loss order on any open positions so you won't miss your basket weaving class.
Weird Sounding Order Types
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not
cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign
exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets
close, but I’d recommend you double check with your broker.
• OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and
duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You
want to either buy at 1.2095 over the resistance level in anticipation of a breakout or
initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095
is reached, you will buy order will be triggered and the 1.1985 sell order will be
automatically canceled.
Always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules
simple is the best strategy.
Summary
The basic order types (market, stop loss, and limit) are usually all that most traders ever need. Unless you are a veteran trader (yeah right), don’t get fancy and design a system of
trading requiring a large number of orders sandwiched in the market at all times – stick with the basic stuff first.
School of Pipsology - 28
Make sure you fully understand and are comfortable with your broker’s order entry
system before executing a trade.
DO NOT make a trade with real money until you have an extremely high comfort level with the trading platform and order entry system.
School of Pipsology - 29
Choosing a Forex Broker
Before trading Forex you need to set up an account with a Forex broker. So what exactly is
a broker? In simplest terms, a broker is an individual or a company that buys and sells
orders according to the trader's decisions. Brokers earn money by charging a commission
or a fee for their services.
You may feel overwhelmed by the number of brokers who offer their services online.
Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.
Is the Forex broker regulated?
When selecting a prospective Forex broker, find out with which regulatory agencies it is
registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your
entire savings will something be done.
In the United States a broker should be registered as a Futures Commission Merchant
(FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive
trade practices. You can verify Commodity Futures Trading Commission (CFTC) registration and NFA
membership status of a particular broker and check their disciplinary history by phoning
NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's
Web site at www.nfa.futures.org/basicnet/.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-
Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.
They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex
trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.
School of Pipsology - 30
Customer Service
Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by
phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an
account. Here’s a good tip: choose several online brokers and contact their help desks. Seeing how
quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you
certainly wouldn't want to trust them with your business. Just be aware that as in other
types of businesses, pre-sales service might be better than post-sales service.
Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very
important. Get a feel for the options that are available by trying out a demo account at a few online brokers.
Closely examine the broker’s screen layout. It should include:
• the ability to view real-time currency exchange rate quotes,
• an account summary showing your current account balance with realized and
unrealized profit and loss, margin available, and any margin locked in open
positions.
Most trading platforms are either Web based (in Java), or a client-based program you can
install on your computer, and which version you choose is your personal preference:
• Web based software is hosted on your broker’s web site. You won’t have to install
any software on your own computer, and you’ll be able to log in from any
computer that has an Internet connection.
• A client-based software program, or one that you download and install, will only
allow you to trade on your own computer (unless you install the program on every
computer you use).
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Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to
run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading
platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.
Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses
and hackers during transmissions than "download and install" software.
But always be sure to open a demo account and test out the broker's platform before
opening a real account!
Don’t forget your high speed Internet connection
The Forex market is a fast moving market and you will need up-to-the second information
to make informed trading decisions. Make sure you have a high speed Internet
connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough! Bells and Whistles
Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software.
Upgraded software packages are usually offered as an extra monthly fee by brokers.
Most brokers now offer integrated charting and technical analysis packages with their
trading platforms. The level of integration with the trading platforms varies and is worth
understanding carefully.
Mini/Micro Accounts
Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started
and test your trading skills and gain experience. Broker Policies
Before selecting an online Forex broker, you should closely examine their features and policies. These include:
School of Pipsology - 32
• Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven
major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips required per
trade by the broker, the greater the profit that the trader makes. Comparing pip
spreads of half dozen brokers will reveal different transaction costs. For example,
the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s
even better.
• Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater
the potential for higher profits and losses. Margin percentages vary from .25% and
up. Low margin requirements are great when your trades are good, but not so
great when you are wrong. Be realistic about margins and remember that they
swing both ways.
• Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and
100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot
consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is
called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots)
which allow you create your own unit size.
• Rollover Charges
Rollover charges are determined by the difference between the interest rate of the
country of the base currency and the interest rates of the other country. The
greater the interest rate differential between the two currencies in the currency
pair, the greater the rollover charge will be. For example, when trading GBP/USD,
if the British pound has the greater interest differential with the U.S. dollar, then
the rollover charge for holding British pound positions would be the most
expensive. On the other hand, if the Swiss Franc were to have the smallest interest
differential to the U.S. dollar, then overnight charges for USD/CHF would be the
least expensive of the currency pairs.
• Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates
normally fluctuate with the prevailing national rates. If you decide to take an
extended break from trading, the money in your margin account will be accruing
interest. Keep in mind that most brokers DO NOT allow you to accrue interest
unless your margin requirement is at least 2% (50:1).
• Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of
operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST
Friday.
School of Pipsology - 33
Other Policies
Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the
nuances that a specific broker may impose on a new trader.
Finding the right broker is a critical part of the process. It’s not easy and requires some
real work on your part. Don’t pick the first one that looks good to you. Keep looking and
trying different demo accounts.
Summary
What to look for in an online Forex broker/dealer:
1. Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any
given currency pair. Lower spreads save you money.
2. Low minimum account openings.
For those that are new to Forex trading and for those that don’t have millions of
dollars in risk capital to trade, being able to open a micro trading account with only
$250 (we recommend at least $1,000) is a great feature for new traders.
3. Instant automatic execution of your orders.
This is very important when choosing a Forex broker. Don’t settle with a firm that
re-quotes you when you click on a price or a firm that allows for price ‘slippage’.
This is very important when trading for small profits. You want what we call a
WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution
of your orders and the price you see and "click" is the price that you should
get...WYSIWYG = What You See Is What You Get!
4. Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis
available to active traders. Look for a broker that provides free professional
charting services and allows traders to trade directly on the charts.
5. Leverage
Leverage can either make you super rich or super broke. Most likely, it will be the
latter. As an inexperienced trader, you don't want too much leverage. A good rule
of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and
200:1 for Mini (10k) accounts.
School of Pipsology - 34
Opening a Trading Account
Opening a new online trading account with a Forex broker can be done in three simple
steps:
1. Selecting an account type
2. Registration
3. Activating your account
Before trading a dime of your hard earned money, you may want to think about opening
demo account. Actually, open up two or three demos - why not? It’s all FREE! Try out
several different brokers to get a feel for the right one for you.
Account Types
When you're ready to open a live account, you have the choice of opening a Forex trading
account under your personal name or a business name. Also, you will have to decide
whether or not you want to open a "standard" account or a "mini" account (or "micro"
account if available). Inexperienced traders or traders with a small amount of capital to
trade should always open a mini account. Only experienced traders with lots of money
should open a standard account.
Always read the fine print.
Some brokers have a “managed account” option in their applications. If you want the
broker to trade your account for you, pick this, but obviously you’re here to learn how to
trade the Forex for yourself. Besides, opening a managed account typically requires a
pretty big minimum deposit - $25,000 or higher - and the broker also takes a portion of the profits.
Also, make sure you open a Forex spot account and not a “forwards” or “futures” account.
Registration
You will have to submit paperwork in order to open an account and the forms will vary
from broker to broker. They are usually provided in PDF format and can be viewed and
printed using Adobe Acrobat Reader program.
Account Activation
School of Pipsology - 35
Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation. After these steps have been completed, you will receive a final email with your username, password, and instructions
on how to fund your account.
So all that’s left is for you to login and start trading. Pretty easy huh?
But wait a darn minute!
STOP!
We strongly advise you spend some time at our entire School of Pipsology before you
start risking real money.
Why?
Because if you don’t, you will lose all of your money and freak out!
You’re probably thinking, “So if I read through your School of Pipsology first, I will not lose
any money?”
No, we’re not saying that. You will still probably lose money...
School of Pipsology - 36
But you’ll lose LESS, much less, and probably feel fine that you lost money. Go through our
entire School of Pipsology and you'll understand what we mean.
Forex versus Stocks
Forex versus Stocks Advantages
Advantage Forex Stocks
24-hour Trading YES NO
Commission Free Trading YES NO
Instant Execution of Market Orders YES NO
Short-Selling without an Uptick YES NO
24-Hour Market
The Forex market is a seamless 24-hour market. Most brokers are open from Sunday at
2PM EST until Friday at 4 PM EST with customer service available 24/7. With the ability to
trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
Commission Free Trading
Most Forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, Forex trading costs are lower than those of any other market. The brokers are compensated for theirs services through the bid/ask prices. Instantaneous Execution of Market Orders
Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You’re able to execute directly off real-time streaming prices (Yeeeaah!).
There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order
execution may experience delays.
School of Pipsology - 37
Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market.
Trading opportunities exist in the currency market regardless of whether a trader is long
or short, or which way the market is moving. Since currency trading always involves
buying one currency and selling another, there is no structural bias to the market. So you
always have equal access to trade in a rising or falling market.
Look at Mr. Forex. He's so confident and sexy. Mr. Stocks has no chance!
More Reasons to Like Forex
No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded
will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker
responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.
Buy/Sell programs do not control the market
How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because
School of Pipsology - 38
today is "triple witching day", all as an explanation of why this stock is up or the market in
general is down or positive on the session. The stock market is very susceptible to large
fund buying and selling.
In spot trading, the liquidity of the Forex market makes the likelihood of any one fund or
bank to control a particular currency very slim. Banks, hedge funds, governments, retail
currency conversion houses and large net-worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.
Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a
prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the
government does to step in and discourage this type of activity, we have not heard the last of it.
IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that
need the companies as clients. That catch-22 will never disappear.
Foreign exchange, as the prime market, generates billions in revenue for the world's banks
and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal
flow, they just analyze the forex market.
8,000 stocks versus 4 major currency pairs
There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of
so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of the market trades the 4 major pairs. Aren’t four pairs much easier to keep
an eye on than thousands of stocks? I’d say so.
Forex versus Futures
Forex versus Futures Advantages
Advantage Forex Futures
24-hour Trading YES NO
Commission Free Trading* YES NO
Up to 400:1 Leverage YES NO
Price Certainty YES NO
Guaranteed Limited Risk YES NO
School of Pipsology - 39
"Hey Mr. Futures, don't our short shorts look cool?"
Liquidity
In the spot Forex market, almost $2 trillion is traded daily, making it the largest and most
liquid market in the world. This market can absorb trading volume and transaction sizes
that dwarf the capacity of any other market. The futures market traders a puny $30 billion
per day. Thirty billion?!! Peanuts! The futures markets can't compete with its limited
liquidity. The Forex market is always liquid, meaning positions can be liquidated and stop
orders executed without slippage except in extremely volatile market conditions.
24-Hour Market
At 2:15 p.m. EST Sunday, trading begins as markets open in Sydney and Singapore. At 7
p.m. EST the Tokyo market opens, followed by London at 2 a.m. EST. And finally, New
York opens at 8 a.m. EST and closes at 5 p.m. EST. So, before New York trading closes the
Sydney and Singapore markets are back open - it’s a 24 hour seamless market! As a
trader, this allows you to react to favorable or unfavorable news by trading immediately.
If important data comes in from England or Japan while the U.S. futures market is closed,
the next day's opening could be a wild ride. (Overnight markets in futures currency
contracts exist, but they are thinly traded, not very liquid, and are difficult for the average
investor to access).
School of Pipsology - 40
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